Hedge Funds Hold Up in Rout as Defensive Stance Finally Pays Off

(Bloomberg) -- Throughout the bull market, through years of subpar returns, the hedge fund refrain has been the same: wait till the market turns. Now it’s turning and at least some of the claims are bearing out.

While a week and a half doesn’t prove much, thanks to defensive positioning and increased bearish bets against stocks, long-short hedge funds tracked by Credit Suisse declined about 3 percent in October through midday Thursday. While some clients would probably prefer no loss at all, that’s only half the retreat in the S&P 500.

It’s reason for relief, at least for a moment, in an industry whose high fees have been criticized amid underperformance. While watching in pain the stock rally that they missed during summer months, fund managers kept leverage near this year’s lows. They also cut tech stocks, many of which were among this month’s biggest losers, Credit Suisse found. Those moves are looking prescient.

“Hedge funds lean into the recent equity market downturn by adding shorts, cutting longs and maintaining their gross footprint to profit from October’s volatility,” Mark Connors, global head of risk advisory at Credit Suisse, wrote in a note to clients. “Managers are actively repositioning their book with an even more defensive tilt.”

Bearish bets have done particularly well. The most-shorted stocks tracked by Goldman Sachs have tumbled almost 10 percent, handing short sellers their best month since early 2016.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Divya Balji

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